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Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2012, and all information contained in these statements rests with the management of the Canada Border Services Agency. These financial statements have been prepared by management using the Government's accounting policies, which are based on Canadian public sector accounting standards.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfill its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of the Canada Border Services Agency's financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in the Canada Border Services Agency's Departmental Performance Report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training, and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout the Agency and through conducting an annual risk-based assessment of the effectiveness of the system of ICFR.

The system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments.

A risk-based assessment of the system of ICFR for the year ended March 31, 2012 was completed in accordance with the Treasury Board Policy on Internal Control and the results and action plans are summarized in the annex.

The effectiveness and adequacy of the Canada Border Services Agency's system of internal controls is reviewed by the work of internal audit staff, who conduct periodic audits of different areas of the Agency's operations, and by the Departmental Audit Committee, which oversees management's responsibilities for maintaining adequate control systems and the quality of financial reporting, and which recommends the financial statements to the President of the Canada Border Services Agency.

The financial statements of the Canada Border Services Agency have not been audited.

The Canada Border Services Agency (Agency Activities) is responsible for providing integrated border services that support national security and public safety priorities and facilitate the free flow of persons and goods. The Canada Border Services Agency Act received royal assent on November 3, 2005. The Agency is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of Public Safety. The Agency is funded through authorities from the Government of Canada.

For financial reporting purposes, the activities of the Agency have been divided into two sets of financial statements: Agency Activities and Administered Activities. The financial statements - Agency Activities include those operational revenues and expenses which are managed by the Agency and utilized in running the organization. The financial statements - Administered Activities include those net revenues that are administered for someone other than the Agency, such as the federal government, a province or territory, or another group or organization. The purpose of the distinction between Agency and Administered activities is to facilitate, among other things, the assessment of the administrative efficiency of the Agency in achieving its mandate.

The Agency is responsible for the administration and enforcement of the following acts or portions of these acts: the Customs Act, the Customs Tariff, the Excise Act, the Excise Tax Act, the Citizenship Act, the Immigration and Refugee Protection Act, as well as other acts on behalf of other federal departments and provinces.

In delivering efficient and effective border management that contributes to the security and prosperity of Canada, the Agency operates under the following program activities:

The Risk Assessment program activity "pushes the border out" by seeking to identify high risk people and shipments as early as possible in the travel and trade continuum to prevent their departure to Canada.

Through the Secure and Trusted Partnerships program activity, the Agency works closely with clients, other government departments and international border management partners to enhance trade chain and traveler security while providing pre-approved, low-risk travelers and traders with streamlined and efficient border processes.

Through the Admissibility Determination program activity, the Agency develops, maintains and administers the policies, regulations, procedures and partnerships that enable border services officers to intercept people and goods that are inadmissible to Canada and to process legitimate people and goods seeking entry into Canada within established service standards, and to administer and enforce the policies and guidelines that govern the reporting and verification of goods exported from Canada.

Under the Criminal Investigations program activity, the Agency investigates and pursues the prosecution of travelers, importers, exporters and/or other persons who commit criminal offences in contravention of Canada's border-related legislation.

The Immigration Enforcement program activity determines whether foreign nationals and permanent residents who are or may be inadmissible to Canada are identified and investigated, detained, monitored and/or removed from Canada.

The Recourse program activity provides the business community and individuals with an accessible mechanism to seek an impartial review of service-related complaints, trade decisions and enforcement actions taken by the Agency. This program activity ensures that the decisions taken by the Agency officials are fair, transparent and accurately reflect the Agency's policies and the Acts administered by the Agency.

The Revenue and Trade Management program activity ensures that duties and taxes owed to the Government of Canada are collected in compliance with Canadian trade and imports reporting requirements. Through this program activity, the Agency also administers international and regional trade agreements and domestic legislation and regulations governing trade and commercial goods.

The Internal Services program activity is a group of related activities and resources that are administered to support the needs of programs and other corporate obligations. The main activities are governance and management support, resource management services, and asset management services.

These financial statements have been prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Significant accounting policies are as follows:

(a) Parliamentary authorities

The Agency is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to the Agency do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and Departmental Net Financial Position and the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting. The planned results amounts in the Statement of Operations and Departmental Net Financial Position are the amounts reported in the future-oriented financial statements included in the 2011-12 Report on Plans and Priorities. The future-oriented financial statements for 2011-2012 have been restated to reflect the revenue net of non-respendable amounts. This restatement resulted in a $ 5,478,000 increase in net costs of operations before government funding and transfers. In addition, the future-oriented financial statements have also been reclassified to conform to the current year presentation.

(b) Net Cash Provided by Government

The Agency operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by the Agency is deposited to the CRF, and all cash disbursements made by the Agency are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements, including transactions between departments of the Government.

(c) Amounts due from or to the Consolidated Revenue Fund

The amounts due from or to the Consolidated Revenue Fund are the result of timing differences at year end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the Agency is entitled to draw from the CRF without further appropriations to discharge its liabilities.

(d) Non-tax revenues

Non-tax revenues reported in this statement include revenues collected on behalf of the Government of Canada under the Immigration and Refugee Protection Act, the Agriculture and Agri-Food Administrative Monetary Penalties Act and other similar legislation.

Non-tax revenues are accounted for in the period in which the underlying transaction or event occurred that gave rise to the revenue.

Revenues that are non-respendable are not available to discharge the Agency's liabilities. While the President of the Agency is expected to maintain accounting control, he has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented as a reduction of the entity's gross revenues.

(e) Expenses

All expenses are recorded on an accrual basis:

Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment.

Services provided without charge by other government departments for accommodation, employer contributions to the health and dental insurance plans, legal services and workers' compensation are recorded as operating expenses at their estimated cost.

(f) Accounts receivable and advances

Accounts receivable and advances are stated at the lower of cost and net recoverable value; a valuation allowance is recorded for receivables where recovery is considered uncertain based on the specific identification and on aging of receivables.

(g) Inventory

Inventory consists of forms, publications and uniforms held for future program delivery and not intended for resale. Inventory is valued at cost using the weighted average cost method. If there are no longer any service potential, inventory is valued at the lower of cost or net realizable value.

(h) Tangible capital assets

All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more are recorded at their acquisition cost. The Agency does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian Reserves and museum collections.

Amortization of tangible capital assets, except land, is done on a straight-line basis over the estimated useful life of the asset as follows:

Asset class

Amortization period

Buildings

30 years

Works and infrastructure

40 years

Machinery and equipment

10 years

Information technology equipment

5 years

In-house-developed software

7 years

Purchased software

3 years

Vehicles

5 years to 10 years

Leasehold improvements

Lesser of the remaining term of lease or useful life of the improvement.

Assets under construction are recorded in the applicable capital asset class in the year that they become available for use and are not amortized until they become available for use.

(i) Employee future benefits

Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multi-employer plan administered by the Government of Canada. The Agency's contributions to the Plan are charged to expenses in the year incurred and represent the Agency's total obligation to the Plan. The Agency's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

Severance benefits: Employees entitled to severance benefits under labour contracts or conditions of employment earn these benefits as services necessary to earn them are rendered. The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

(j) Contingent liabilities

Contingent liabilities are potential liabilities which may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.

(k) Environmental liabilities

Environmental liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites. Based on management's best estimates, a liability is accrued and an expense recorded when the contamination occurs or when the Agency becomes aware of the contamination and is obligated, or is likely to be obligated to incur remedial costs. If the likelihood of the Agency's obligation to incur these costs is either not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as contingent liabilities in the notes to the financial statements.

(l) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable.

The most significant items where estimates are used are contingent liabilities, environmental liabilities, the liability for employee severance benefits, the allowances for doubtful accounts and the useful life of tangible capital assets. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

The Agency receives most of its funding through annual parliamentary authorities. Items recognized in the Statement of Operations and Departmental Net Financial Position and the Statement of Financial Position in one year may be funded through parliamentary authorities in prior, current or future years. Accordingly, the Agency has different net results of operations for the year on a government funding basis than on an accrual accounting basis.

The differences are reconciled in the following tables:

(a) Reconciliation of net cost of operations to current year authorities used

2012

2011

(in thousands of dollars)

Net cost of operations before government funding and transfers

1,865,491

1,831,407

Adjustments for items affecting net cost of operations but not affecting authorities:

Services provided without charge by other government departments

(160,823)

(157,377)

Amortization of tangible capital assets

(43,261)

(42,648)

Decrease (increase) in employee future benefits

7,096

(12,958)

(Increase) in vacation pay and compensatory leave

(9)

(2,807)

Gain on disposal and write-down of tangible capital assets

787

6,092

(Increase) in allowance for bad debt

(760)

(3,270)

(Increase) in environmental liabilities

(135)

(1,994)

Refund of prior years' expenditures

684

975

(Increase) in contingent liabilities

(3,530)

0

Other

(519)

47

Total items affecting net cost of opeartions but not affecting authorities

(200,470)

(213,940)

Adjustments for items not affecting net cost of operations but affecting authorities:

Acquisition of tangible capital assets

171,368

71,697

Proceeds from disposal of tangible capital assets

(213)

(225)

(Decrease) increase in inventory

(900)

6,585

Increase in prepaid expenses

21

28

Total items not affecting net cost of operations but affecting authorities

The deposit accounts were established to record cash and securities required to guarantee payment of customs duties and excise taxes on imported goods pursuant to the Customs Act and the Excise Tax Act and to guarantee the compliance of transporters and individuals with the provisions of the Immigration and Refugee Protection Act.

The Agency's employees participate in the Public Service Pension Plan, which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of 2 percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Quebec pension plan benefits and they are indexed to inflation.

Both the employees and the Agency contribute to the cost of the Plan. The 2011-2012 expense amounts to $137,438,000 ($127,763,000 in 2010-2011), which represents approximately 1.8 times (1.9 in 2010-11) the contributions by employees.

The Agency's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

(b) Severance benefits

The Agency provides severance benefits to its employees based on eligibility, years of service and final salary. These severance benefits are not pre-funded. Benefits will be paid from future authorities.

As part of collective agreement negotiations with certain employee groups, and changes to conditions of employment for executives and certain non-represented employees, the accumulation of severance benefits under the employee severance pay program ceased for these employees commencing in 2012. Employees subject to these changes have been given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.

Information about the severance benefits, measured as at March 31, is as follows:

(1) Adjustments include assets under construction of $ 17,060 that were transferred to the other categories upon completion of the assets.

Effective November 15, 2011, the Agency transferred information technology equipment with a net book value of $ 193,683 to the Shared Services Canada. This transfer is included in the adjustments columns (refer to note 13 for further details on the transfer).

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into two categories as follows:

(a) Contaminated sites

Liabilities are accrued to record the estimated costs related to the management and remediation of contaminated sites where the Agency is obligated or likely to be obligated to incur such costs. The Agency identified four sites in 2012 (three sites in 2010-2011) where such action is possible and for which a liability of $2,421,000 ($2,286,000 in 2010-2011) has been recorded in accrued liabilities. No additional costs are known or expected. The Agency's ongoing efforts to assess contaminated sites may result in additional environmental liabilities related to newly identified sites, or changes in the assessments or intended use of existing sites. These liabilities will be accrued in the year in which they become likely and are reasonably estimable.

(b) Claims and litigation

Claims have been made against the Agency in the normal course of operations. These claims include items with pleading amounts and other for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. The Agency has recorded an allowance for claims and litigations where it is likely that there will be future payment and a reasonable estimate of the loss can be made of $3,560,000 ($290,000 in 2010-2011). Claims and litigations for which the outcome is not determinable and a reasonable estimate can be made by management, amount to approximately $1,616,400,000 ($1,559,500,000 in 2010-2011) at March 31, 2012.

The nature of the Agency's activities can result in some large multi-year contracts and obligations whereby the Agency will be obligated to make future payments in order to carry out its programs or when services and goods are received. Significant contractual obligations that can be reasonably estimated are summarized as follows:

The Agency is related as a result of common ownership to all Government departments, agencies and Crown corporations of Canada. The Agency enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, the Agency received common services which were obtained without charge from other Government departments as disclosed below:

(a) Common services provided without charge by other government departments

During the year, the Agency received without charge from certain common service organizations, related to accommodation, legal services, the employer's contribution to the health and dental insurance plans and workers' compensation coverage. These services without charge have been recorded in the Agency's Statement of Operations and Departmental Net Financial Position as follows:

2012

2011

(in thousands of dollars)

Accommodation

63,677

62,008

Employer's contribution to the health and dental insurance plans

86,899

83,381

Workers' compensation coverage

340

413

Legal services

9,907

11,575

Total

160,823

157,377

The Government has centralized some of its administrative activities for efficiency, cost-effectiveness purposes and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as payroll and cheque issuance services provided by Public Works and Government Services Canada and audit services provided by the Office of the Auditor General are not included as an expense in the Agency's Statement of Operations.

(b) Administration of programs on behalf of other government departments

Under a memorandum of understanding signed with Statistics Canada on March 21, 1984, the Agency provides statistical information relating to imports and exports. During the year, the department incurred expenses of $2,500,057 ($2,547,947 in 2010-2011) on behalf of Statistics Canada. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under a memorandum of understanding signed with the Department of National Defence on September 30, 2009, the Agency conducts non invasive sampling and analysis of explosives in air and sea cargo containers. During the year, the department incurred expenses of $589,000 ($196,000 in 2010-2011) on behalf of the Department of National Defence. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under an administrative arrangement signed with Canadian International Development Agency on May 4, 2009, the Agency administers a program to help develop the borders in Haiti. During the year, the department incurred expenses of $575,069 ($385,337 in 2010-2011) on behalf of Canadian International Development Agency. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under an administrative arrangement signed with Canadian International Development Agency on December 15, 2009, the Agency commences a project to strengthen the State Customs Services of the Ukraine laboratory system. During the year, the department incurred expenses of $543,640 ($262,292 in 2010-2011) on behalf of Canadian International Development Agency. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under a memorandum of understanding signed with the Department of National Defence on June 27, 2011, the Agency conducts research on face recognition in video. During the year, the department incurred expenses of $150,000 (nil in 2010-2011) on behalf of the Department of National Defence. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under a letter of agreement signed with the Department of National Defence on August 16, 2011, the Agency conducts a consolidated evaluation of the trace of explosives detectors. During the year, the department incurred expenses of $124,000 (nil in 2010-2011) on behalf of the Department of National Defence. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under a memorandum of understanding signed with the Department of National Defence on July 6, 2011, the Agency conducts research on operational video based evaluation of infrastructure and technology. During the year, the department incurred expenses of $120,000 (nil in 2010-2011) on behalf of the Department of National Defence. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

Under an administrative arrangement signed with the Department of National Defence on October 27, 2011, the agency conducts a study to collect data on radiation detection at a Canada Post mailing processing plant. During the year, the department incurred expenses of $65,000 (nil in 2010-2011) on behalf of the Department of National Defence. The expenses noted above are reflected in the financial statements of the other government departments and not recorded in these financial statements.

(c) Administration of programs on behalf of CBSA

The Agency has arrangements with the Canada Revenue Agency for the provision of information technology services to CBSA, which are paid for on a quarterly basis for a total of $129,149,000 ($139,808,000 in 2010-2011).

(d) Other transactions with related parties

2012

2011

(in thousands of dollars)

Accounts payable to other government departments and agencies

25,792

30,208

Accounts receivable from other government departments and agencies

8,335

7,321

Expenses - other government departments and agencies

481,254

410,354

Revenues - other government departments and agencies

469

480

Expenses and revenues disclosed in (d) exclude common services provided without charge, which are already disclosed in (a).

Effective November 15, 2011, the Agency transferred responsibility for the telecommunications and common network services to Shared Services Canada in accordance with the Order-in-Council 2011-1297, including the stewardship responsibility for the assets and liabilities related to these activities. Accordingly, the Agency transferred the following assets and liabilities to Shared Services Canada:

2012

(in thousands of dollars)

Assets:

Tangible capital assets (net book value) (note 9)

194

Total assets transferred

194

Liabilities:

Vacation pay and compensatory leave

201

Employee future benefits (note 6)

577

Total liabilities transferred

778

Adjustment to the departmental net financial position

(584)

During the transition period, the Agency continued to administer the transferred activities on behalf of Shared Services Canada. The administered expenses amounted to $ 37,270 for the period between November 15, 2011 and March 31, 2012. The expenses are not recorded in these financial statements.

Presentation by segment is based on the Agency's program activity architecture. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 2. The following table presents the expenses incurred and the revenues generated for the main program activities, by major object of expenses and by major type of revenues.

During 2011, amendments were made to Treasury Board Accounting Standard 1.2––Departmental and Agency Financial Statements to improve financial reporting by government departments and agencies. The amendments are effective for financial reporting of fiscal years ending March 31, 2012, and later. The significant changes to the Agency's financial statements are described below. These changes have been applied retroactively, and comparative information for 2010-11 has been restated as per below.

Net debt (calculated as liabilities less financial assets) is now presented in the Statement of Financial Position.
Accompanying this change, the Agency now presents a Statement of Change in Net Debt and no longer presents a Statement of Equity. Consolidated Revenue Fund has been restated due to an error in accounting for the definition of this item.

Revenue and related accounts receivable are now presented net of non-respendable amounts in the Statement of Operations and Departmental Net Financial Position and Statement of Financial Position. The effect of this change was to increase the net cost of operations after government funding and transfers by $ 3,942,500 for 2012 ($ 7,002,600 for 2011). Revenues have been restated by type as oppose to by program activity. Some expenses were not restated for new program activity structure due to no direct or indirect correlation between the new structure and the prior year structure, and to avoid misleading financial statement users. To avoid misleading financial statement users and due to a lack of meaningful and verifiable method to obtain the amount of transferred operations prior to the Order in Council date of transfer including the previous fiscal year, no amount for transferred operations was disclosed for the period prior to the transfer.

Government funding and transfers, as well as the credit related to services provided without charge by other
government departments, are now recognized in the Statement of Operations and Departmental Net Financial
Position below "Net cost of operations before government funding and transfers." In previous years, the
Agency recognized these transactions directly in the Statement of Equity of Canada. The effect of this change was to decrease the net cost of operations after government funding and transfers by $ 1,992,500,000 for 2012 ($ 1,849,600,000 for 2011).

(Increase) Decrease in accounts receivable - other federal government departments and agencies

(26,529)

1,941,693

(Increase) Decrease in taxes receivable

(19,049)

(132,215)

Increase (Decrease) in accounts payable - other federal government departments and agencies

81,098

136,410

Increase (Decrease) in payable to provinces

885

(7,134)

Increase (Decrease) in taxes payable

(235)

958

Increase (Decrease) in deposit accounts

3,674

134

Net cash deposited in the Consolidated Revenue Fund
of the Government of Canada

24,949,201

25,016,825

Consisting of:

Cash deposits to the Consolidated Revenue Fund

25,656,858

25,592,068

Cash payments/refunds from the Consolidated Revenue Fund

(707,657)

(575,243)

Net cash Deposited in the Consolidated Revenue Fund
of the Government of Canada

24,949,201

25,016,825

The accompanying notes form an integral part of these financial statements.

Notes to the March 31, 2012 Financial Statements (Unaudited)

1. Authority and Objectives

The Canada Border Services Agency (Agency) is responsible for providing integrated border services that support national security and public safety priorities and facilitate the free flow of persons and goods. The Canada Border Services Agency Act received royal assent on November 3, 2005. The Agency is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of Public Safety. The Agency is funded through appropriations from the Government of Canada.

The Agency is responsible for the administration and enforcement of the following acts or portions of these acts: the Customs Act, the Customs Tariff, the Excise Act, the Excise Tax Act, the Citizenship Act, the Immigration and Refugee Protection Act, as well as other acts on behalf of other federal departments and provinces.

The Agency administered activities reports on tax and non-tax revenues, assets and liabilities administered on behalf of the federal, provincial and territorial governments.

2. Summary of Significant Accounting Policies

The purpose of these Administered Activities financial statements is to present information about revenues, expenses, assets and liabilities that the Agency administers on behalf of the federal, provincial and territorial governments. The Agency reports against accounting principles that are consistent with those applied in the preparation of the financial statements of the Government of Canada.

A summary of significant accounting policies are as follows:

(a) Tax Revenues

The determination of the Agency's tax revenues is based on the taxes and duties assessed that relate to goods authorized by the Agency to enter into Canada during the fiscal year that ended March 31. These revenues are recognized at the time the goods are released.

Excise taxes: Consists of the goods and services tax (GST) and the harmonized sales tax (HST) assessed on imports, net of the GST remission order to the Canada Revenue Agency (CRA) and the provincial portion of the HST. Domestic HST and GST, as well as the input tax credits accorded for GST/HST paid on importations and domestic transactions, are not reflected in these statements as the CRA is responsible for their administration. Excise taxes are also assessed on gasoline and other miscellaneous imports.

Customs import duties: Consists of import duties assessed on imports. They are shown net of any refunds, rebates and drawbacks.

Excise duties: Consists of tobacco, beer and liquor duties assessed on imports. They are shown net of refunds, rebates and drawbacks.

The Canadian customs and tax systems are predicated on self-assessment where importers are expected to understand the laws and comply with them. This has an impact on the completeness of duty and tax revenues when importers fail to comply with laws. The Agency has implemented systems and controls in order to detect and correct situations where importers are not complying with the various acts it administers. These systems and controls include performing audits of importer records where determined necessary by the Agency. Such procedures cannot be expected to identify all undeclared or incorrectly declared importations or other cases of non-compliance. The Agency does not estimate the amount of unreported duties and taxes. However, such amounts are included in revenues when identified during reassessment.

(b) Non-tax revenues

Non-tax revenues consists of items such as fees, penalties, interest and fines and are recognized in the period in which the underlying transaction or event occurred that gave rise to the revenue.

(c) Cash on hand

Cash includes amounts received in Agency offices or by Agency agents as at March 31 but not yet deposited to the credit of the Consolidated Revenue Fund (CRF) of the Government of Canada.

(d) Taxes receivable

Taxes receivable represent duties and taxes and other revenues not yet collected. All receivables are stated at amounts ultimately expected to be realized. A provision is made for doubtful accounts where recovery is considered uncertain.

(e) Allowance for doubtful accounts

The allowance for doubtful accounts reflects management's best estimate of the collectability of accounts receivable, including the related interest and penalties. The allowance for doubtful accounts is composed of two parts which are reviewed on an annual basis. A portion of the allowance is based on the age of the accounts and the other portion is calculated based on accounts in appeal.

(f) Payable to provinces

Payable to provinces represents amounts derived from memorandums of understanding (MOUs) between the provinces and the Agency, whereby provincial sales, alcohol and tobacco taxes are collected and remitted to the provinces.

(g) Taxes payable

Taxes payable to importers represent refunds and related interest resulting from assessments completed after March 31 for excise duties, customs import duties and GST/HST for current or prior year imports.

(h) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expense reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant item where estimates are used is for establishing the allowance for doubtful accounts. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

3. Excise Taxes

The following table presents details of the excise tax revenues:

2012

2011

(in thousands of dollars)

GST/HST

20,115,492

18,365,500

Tax remission order

(57,106)

(42,146)

Transfer of HST to Provinces

(203,854)

(137,447)

Total

19,854,532

18,185,907

Excise tax - gasoline

59,633

43,755

Other excise tax

12,870

35,639

Total

72,503

79,394

Total excise taxes

19,927,035

18,265,301

4. Taxes Receivable

Taxes receivable represent the customs duties, excise taxes, GST and HST, penalties and interest due to the Receiver General for Canada as a result of importations into Canada.

The following table presents details of taxes receivable:

2012

2011

(in thousands of dollars)

Taxes receivable

1,514,568

1,453,300

Allowance for doubtful accounts

(78,647)

(36,428)

Taxes receivable

1,435,921

1,416,872

5. Payable to Provinces

The following table presents details of provincial sales, alcohol and tobacco taxes collected and remitted to the provinces:

2012

2011

(in thousands of dollars)

Opening balance

8,347

15,481

Receipts from importers

41,951

60,800

Refunds to importers

(217)

(2,505)

Payments to provinces

(40,849)

(65,429)

Closing balance

9,232

8,347

6. Deposit Accounts

The deposit accounts were established to record cash and securities required to guarantee payment of customs duties and excise taxes on imported goods pursuant to the Customs Act and the Excise Tax Act.

The following table presents details on the deposit accounts:

2012

2011

(in thousands of dollars)

Opening Balance

9,065

8,931

Receipts

3,957

3,346

Payments

(283)

(3,212)

Closing Balance

12,739

9,065

7. Net amount due to the Consolidated Revenue Fund

The net amount due to the Consolidated Revenue Fund (CRF) on behalf of the Government of Canada is the difference between administered assets and other administered liabilities payable by the Agency out of the CRF.

The change in the net amount due to the CRF during the fiscal year is presented in the table below:

2012

2011

(in thousands of dollars)

Opening Balance

2,872,762

4,662,866

Net administered revenues

25,084,601

23,226,721

Net cash deposited in the Consolidated Revenue Fund

(24,949,201)

(25,016,825)

Closing Balance

3,008,162

2,872,762

8. Related Party Transactions

The Agency is related as a result of common ownership to all Government departments, agencies and Crown corporations. The Agency enters into transactions with these entities in the normal course of business and on normal trade terms. The Agency also receives collection services from Canada Revenue Agency under Part V.I of the Customs Act.

Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting Fiscal Year 2011-12

Note To The Reader

With the Treasury Board Policy on Internal Controlthatbecameeffective April 1, 2009, departments are required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR).

As part of this policy, departments are expected to conduct annual assessments of their system of ICFR, to establish an action plan to address any necessaryadjustments, and to attach to their Statements of Management Responsibilitya summary of their assessment results and action plan.

assets are safeguarded from risks such as waste, abuse, loss, fraud and mismanagement; and

applicable laws, regulations and policies are followed.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess the effectiveness of associated key controls, to adjust them as required, and to monitor the system in support of continuous improvement. As a result, the scope, pace and status of those departmental assessments of the effectiveness of their system of ICFR will vary from one organization to another ,based on risks and taking into account their unique circumstances.

It is important to note that the system of ICFR is not designed to eliminate all risks, but rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate.

1. Introduction

This document is an annex to the Canada Border Services Agency (CBSA) Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal year 2011-12. As required by the Treasury Board Policy on Internal Control, this document provides summary information on the measures taken by the CBSA to maintain an effective system of internal control over financial reporting (ICFR). In particular, it provides summary information on the results of the assessments conducted by the CBSA as of March 31, 2012, and the related action plans; it provides information on progress made so far, along with some financial highlights pertinent to understanding the control environment unique to the Agency.

1.1 Authority, Mandate and Program Activities

Detailed information on the CBSA‘s authority, mandate and program activities can be found in the Departmental Performance Report [Estimates] and Section I of the Report on Plans and Priorities [Estimates].

The CBSA net cost of operations before government funding and transfers was $ 1.9 billion with salaries and employee benefits being the largest expense ($ 1.4 billion or 74.3 percent of total expenses). Other expenses included professional and special services ($ 236.6 million or 12.6 percent), rental of land buildings ($ 68.3 million or 13.6 percent and transportation and communication ($ 59.5 million or 3.2 percent).

For Agency activities, as of March 31, 2012, the CBSA reported total assets of $ 692.7 million which were comprised mainly of tangible capital assets ($ 575.9 million or 85.0 percent). The total reported liabilities for Agency activities were $ 420.7 million which were mainly comprised of employee severance benefits ($ 228.6 million or 54.3 percent) and accounts payable and accrued liabilities ($ 105.7 million or 25.1 percent).

Agency-administered activities (revenues)

Information on Agency-administered activities are summarized in section 6 of this annex.

Financial statements (unaudited) of the administered activities (revenues) for fiscal-year 2011-12 can be found at [Corporate Documents]. Information can also be found in the Public Accounts of Canada [Receiver General for Canada].

For fiscal-year 2010-11, the CBSA reported total tax revenues of $23.2 billion and total non-tax revenue of $17.0 million. For administered activities, as at March 31, 2011, the CBSA reported total assets of $3.0 billion; this comprised of cash ($1.7 billion or 53.9 percent); accounts receivable from other federal government departments and agencies ($5.4 million or 0.2 percent); and taxes receivable ($1.4 billion or 45.9 percent). The total reported liabilities for administered activities were $211.9 million, with the majority due to other federal government departments ($192.4 million or 90.8 percent) and the provinces ($8.3 million or 3.9 percent). The low ratio of total liabilities, in comparison to total assets, is explained by the fact that the primary objective of reporting administered activities, separate from operating activities (Agency activities), is to report revenues which normally do not generate significant liabilities.

1.3 Service arrangements relevant to financial statements

The CBSA relies on other Federal organizations for the processing of certain transactions that are recorded in its financial statements.

Key Common Arrangements:

Public Works and Government Services Canada (PWGSC) centrally administers the payments of salaries and some of the CBSA's procurement of goods and services.

Treasury Board Secretariat provides the department with information used to calculate various accruals and allowances, such as the accrued severance liability.

The Department of Justice provides general legal services to the CBSA along with information necessary for the note to the financial statements on contingent liabilities.

Shared Services Canada (SSC) was created on August 4, 2011 to consolidate, streamline and improve the government's information technology (IT) infrastructure services, specifically email, data centre and network services for 43 federal departments and agencies. Effective November 15, 2011, the responsibilities for email, data center and network services, including associated resources, was transferred from the CBSA to SSC. The administration and delivery of these services were shared during the 2011-12 transition period while SSC was being established.

Key Specific Arrangements:

The CBSA has arrangements with the Canada Revenue Agency (CRA) for the provision of information technology services and for the collection of all outstanding debts including any duty, tax, fee, penalty, charge or other amount owing under the Customs Act, Customs Tariff, Excise Tax Act, Excise Act, Excise Act 2001,Special Import Measures Act, and/or related regulations.

1.4 Material changes in fiscal-year 2011-2012

No significant departmental changes that are relevant to the financial statements occurred in 2011-12.

2. Control Environment of the CBSA Relative to ICFR

Entity level controls set the tone from the top to help ensure that staff at all levels understand their roles in maintaining effective systems of ICFR and are well equipped to exercise these responsibilities effectively in support of sound stewardship of public resources and reliable financial reporting.

The purpose of the key components of entity level controls at the CBSA is to ensure solid governance and effective risk management at the corporate level, as well as the maintenance of other entity level controls to provide effective support to staff by raising awareness and providing appropriate knowledge, skills and tools. The ultimate objective is to manage risks while maintaining a responsive control environment for people at all levels that supports innovation and continuous improvement. The CBS's main entity level controls currently in place and relevant to ICFR are set out below.

2.1 Key positions, roles and responsibilities

Below are the CBSA'S key positions and committees with responsibilities for maintaining and reviewing the effectiveness of Agency's system of ICFR.

President – The President, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the President chairs the Departmental Audit Committee and the Executive Committee.

Executive Vice-President – The Executive Vice-President (EVP) reports directly to the President. In this role, the EVP is the primary support to the President in discharging his obligations as Accounting Officer and for ensuring that an effective system of ICFR is in place and functioning as intended. The VP also chairs the Operations Committee.

Chief Financial Officer (CFO) – The CFO reports directly to the President and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective system of ICFR. The CFO chairs the Comptrollership Standing Committee (CSC), and, whose membership includes the Associate Vice-President of Operations Branch, Vice Presidents of Programs and Science and Technology, the Chief Audit Executive and the Directors General from Operations and Programs.

Vice Presidents – The Vice Presidents are responsible for maintaining and reviewing the effectiveness of the system of ICFR within their respective areas of responsibility.

Chief Risk Officer – The Chief Risk Officer is responsible for providing objective advice to the President, Executive Vice-President and the Executive Committee on new and emerging risks, both internal and external, and on how the Agency is positioned to address them.

Chief Audit Executive (CAE) – The CAE reports directly to the President and provides assurance through periodic internal audits which are instrumental for the maintenance of an effective system of ICFR.

Departmental Audit Committee (DAC) - The DAC is an advisory committee that provides objective views on the Agency's risk management, control and governance frameworks. The DAC is comprises the President, the EVP and four external members. As such, the DAC reviews the CBSA's risk profile and its system of internal control, including the assessment and action plans related to the system of ICFR.

2.2 Key measures taken by the organization

The CBSA's control environment also includes a series of measures to equip its staff to manage risks well through raising awareness, providing appropriate knowledge and tools as well as developing skills. Key measures include:

the CBSA Code of Conduct;

an Office of Senior Ethics official and the Senior Officer for Internal Disclosure;

a division dedicated to internal control for financial reporting under the direction of the Agency Comptroller;

annual performance agreements with clearly set out financial management responsibilities;

training program and communications in core areas of financial management;

financial policies tailored to the CBSA's control environment;

regularly updated delegated financial signing authorities matrix;

documentation of main business processes and related key risk and control points to support the management oversight of its system of ICFR;

IT processing systems to achieve greater security, integrity, efficiency and effectiveness; and

A risk-based internal audit plan, with annual coverage of governance and risk management.

3. Assessment of the CBSA's System of ICFR

3.1 Assessment approach

To satisfy the requirement of the Policy on Internal Control, the Agency must be able to maintain an effective system of ICFR with the objective of providing reasonable assurance that:

transactions are appropriately authorized;

financial records are properly maintained;

assets are safeguarded; and

applicable laws, regulations and policies are followed.

This includes assessment of the design effectiveness and the operating effectiveness of the system of ICFR which leads to ensuring the ongoing monitoring and continuous improvement of the departmental system of ICFR.

Design effectiveness means to ensure that key control points are identified, documented, in place and that they are aligned with the risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate) and that any remediation is addressed.

Operating effectiveness means that the application of key controls has been tested over a defined period of time and that any required remediation is addressed.

Ongoing monitoring is an on-going process to periodically assess and sustain the management of internal controls in support of continuous improvement. It involves a systematic risk-based approach whereby the Agency has in place a rotational schedule through which design and operating effectiveness of key controls are assessed and reassessed, including making any necessary adjustments.

The significant findings from the current year assessment are summarized below.

4.1 New or significantly amended key controls

There were no significantly amended key in the 2011-12 fiscal year.

4.2 Operating effectiveness

Information technology general controls (ITGCs)

In 2011-12 fiscal years, following the review results of the design assessment of IT General (key) Controls that relate to the systems' operations, security and implementation and maintenance processes, CRA management has implemented action plans and the necessary adjustments to a number of controls requiring improvements. For the implementation action plans status, refer to CRA (Canada Revenue Agency) Annex to the Statement of Management Responsibility, including Internal Controls Over Financial Reporting (hyperlink)

4.3 On-going monitoring program

Entity-level controls (ELCs)

During 2011-12, the CBSA assessed the design effectiveness of entity-level controls framework by performing a comparative analysis with the CBSA Management Accountability Framework (MAF) Round IX. Based upon this assessment, minor gaps in the design of entity-level controls were identified and these were promptly addressed. Also, a risk-based on-going monitoring action plan was developed and this includes clear identification of roles and responsibilities of various agency OPI, the establishment of an ad-hoc consultation committee whose membership included representatives from the Internal audit and Enterprise Risk Management divisions, a yearly validation process with the Agency's key senior managers and the annual determination of key risk areas for testing.

Business Process

The Agency completed its assessment of key controls in capital/ inventory, payment requisitioning (section 33 FAA), compensation and hospitality/travel expenditure processes. Internal control deficiencies were identified and communicated promptly to the responsible business process owners. The results from the assessments were as follows:

Capital Assets / Inventory: Key control issues were found in the capital asset expenditure processes particularly with respect to assets under construction. Remedial action is currently being taken.

Payment requisitioning: Key control deficiencies identified were about review certification and quality assurance of payment review practices. Remedial action is currently being taken.

Travel and Hospitality: No key control deficiencies were identified.

Compensation: Key control deficiencies identified and already rectified were about timeliness of Letters of Offer, peer verification, accuracy of cash-out calculation, approval functions and mandatory documentation.

5. CBSA Testing Plan - Agency Activities (Expenditures)

5.1 Progress in fiscal year 2011-12

During 2011-12, all commitments from previous year's Annex were completed.

Commitments from previous year's Annex

Status

Comments

Complete the documentation of the year-end/monthly financial closing and reporting procedures, and asset safeguarding and control frameworks.

Completed

Frameworks will be validated in 2012-2013 as part of the design & operational testing cycle

Complete design effectiveness testing for the Entity Level Controls

Completed

Strategic risk based multi-year testing plan has been developed and will be implemented in 2012-2013.

Complete design and operating effectiveness testing for the ITGC controls of the external service provider (CRA) for CAS services

Completed

Action plans to address controls requiring improvements were developed. The majority of the actions have been implemented while a few of the longer term ones have been substantially advanced.

5.2 Action plan for the next fiscal year and subsequent years

Having gone through the full assessment process in previous years for the majority of its key processes, the Agency's focus is the on-going monitoring cycle. Only operating effectiveness testing is conducted in those areas subject to reassessment unless significant amendments have been made to key controls and design effectiveness testing is necessary.

The table below shows the agency's testing progress and plan. A risk assessment is conducted each year to validate the high risk controls and to adjust the on-going monitoring plan as required.

This plan is based on current resources and prepared in the context of the government's current priorities environment and the Agency's current control environment. Major changes to departmental structure could impact timelines and scope. The plan will be updated on an annual basis.

6. Agency-Administered Activities (Revenues) in the System of ICFR

The CBSA's administered activities include tax and non-tax revenues, assets and liabilities administered on behalf of the Government of Canada, Canadian provinces or territories.

6.1 Progress in fiscal year 2011-12

Information technology general controls (ITGCs)

As reported in prior years' annexes, the CBSA has made significant advancement to improve the systems and processes that support the administration of revenues. The CBSA Assessment and Revenue Management (CARM) and the Accounts Receivable Sub-ledger (ARL) systems are the principal initiatives which will enable these improvements. The ARL system is the first stage of system modernization and is expected to be implemented in 2013-2014.

Cash Management Review Framework

During 2011-12, the Cash Management Review Framework was published on the CBSA's Intranet site. The framework clearly established the roles and responsibilities of the various parties involved in the management of Revenues. The ongoing monitoring of revenue management process is being performed in all regions and is covering three main areas: Revenue receipts and deposits, Security and control of Public Funds, and Reviewing cash receipts registers. Even if significant improvements have been noted across the Agency, there are still areas of improvements. Regions have established action plans to address those areas and their implementation are monitored centrally.

Revenue Reconciliation Process

During 2011-12, significant improvements have been realized for the reconciliation of revenues recorded in our several legacy systems to the Revenue Ledger used to produce financial reports. A dedicated team has been created, specialized equipment purchased, and reconciliation procedures developed. The reconciliation has been completed for the years 2005 to current and monthly reconciliations are now performed on an ongoing basis.

During the next fiscal year, the CBSA intends to document through key financial control frameworks, key accounts and financial functions with the identification of key process owners, risks and control points including the mapping of key processes of the following major systems.

Business process

Document

Design effectiveness

Operating effectiveness

Start ongoing monitoring activities

Review and Monitoring of Revenue Management Processes

2012-2013

2013-2014

2014-2015

2014-2015

Deposit Preparation and Bank Deposit Processes

2012-2013

2014-2015

2014-2015

2015-2016

Systems Improvements

During 2012-2013, further advancement will be made in the implementation of the Accounts Receivable ledger (ARL) project. The CBSA Assessment and Revenue Management (CARM) project will continue. The primary goal of these initiatives is to provide a viable solution to the current difficulties encountered in obtaining accurate, timely, complete and reliable financial information for an efficient and effective management of, and accounting for tax revenues. During the development and construction phases of both initiatives, particular attention is being deployed in order to ensure internal control systems are embedded in the new solutions.

Notes

This plan is based on current resources and prepared in the context of the government's current priorities environment and the Agency's current control environment. Major changes to departmental structure could impact timelines and scope. The plan will be updated on an annual basis. [Return to text]

This plan is based on current resources and prepared in the context of the government's current priorities environment and the Agency's current control environment. Major changes to departmental structure could impact timelines and scope. The plan will be updated on an annual basis. [Return to text]